Bangkok--Nov 30--Moody's Investor Services
Moody's Investor Services has assigned a provisional (P)B3 rating to Advance Agro Public Company Limited's (AA) proposed US$250 million senior unsecured bond with a stable outlook. At the same time, Moody's has placed the Caa1 rating for AA's guaranteed unsecured notes due 2007 on review for possible upgrade.
The proposed bond proceeds will be utilized to refinance existing secured
debt under a Master Override Agreement (MOA) with the Thai Banks and in accordance with an escrow account arrangement. Moody's expects to assign a definitive rating to the proposed bonds and remove it from provisional status upon completion of the bond issuance and repayment of the secured debt under MOA.
The (P)B3 rating reflects AA's high financial leverage and limited
cushion for withstanding the volatile nature of commodity product prices. Furthermore, the rating reflects AA's technical default status on its 2007 notes due to noncompliance with (1) the filing of Form 20-Fs; and (2) its approval of certain related-party transactions.
However, the rating agency understands AA is current on its coupon
payments, and has provided financial information to the public and has disclosed related-party transactions in its consolidated financial statements. Moody's further draws comfort from the fact that no request has emerged from bondholders for an acceleration of payments, but such failure to comply with covenants prompts concerns over corporate governance.
The company is further expected to expand in-house capacity to maximize
profitability at its current high utilization level. Given its already high financial leverage, any large-scale debt-funded growth plan would further boost leverage and weaken financial flexibility.
At the same time, the rating is supported by AA's competitive cost
position, its brand development with good quality products and track record for generating positive free cash flow.
The existing Caa1 senior unsecured debt rating reflects legal subordination risk, with secured debt representing around 70% of total debts. Pro-forma for the proposed bond issuance and refinancing of debt under MOA, secured debt will reduce to around 5% of total debts. Moody's expects to upgrade the rating to B3 upon the refinancing of the secured debts.
Upward ratings pressure would evolve if there is: 1) an improvement in
its liquidity position, including reduced reliance on short-term funding; 2) establishment of a track record to comply with its bond covenants; and 3) maintenance of its current financial profile, including the ability to generate free cash flow and maintain TD/EBITDA below 4.0x - 4.5x on a sustainable basis.
On the other hand, the ratings would come under downward pressure if
there is: 1) an acceleration of repayments from bondholders; 2) upstreaming of funds to support other group companies; or 3) a material downward trend in the paper market and an aggressive debt-funded capex plan, resulting in TD/EBITDA above 5.5x -- 6.0x and EBITDA/Int below 1.5x.
Advance Agro (AA), headquartered in Bangkok, Thailand, is an integrated
producer of pulp, uncoated free sheet, and coated paper.
Hong Kong
Ken Chan
Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121 End.